Since Forbes hired me in 1995 to write a legal column, I’ve taken advantage of the great freedom the magazine grants its staff, to pursue stories about everything from books to billionaires. I’ve chased South Africa’s first black billionaire through a Cape Town shopping mall while admirers flocked around him, climbed inside the hidden chamber in the home of an antiquarian arms and armor dealer atop San Francisco’s Telegraph Hill, and sipped Chateau Latour with one of Picasso’s grandsons in the Venice art museum of French tycoon François Pinault. I’ve edited the magazine’s Lifestyle section and opinion pieces by the likes of John Bogle and Gordon Bethune. As deputy leadership editor, these days I mostly write about careers and corporate social responsibility. I got my job at Forbes through a brilliant libertarian economist, Susan Lee, whom I used to put on television at MacNeil/Lehrer NewsHour. Before that I covered law and lawyers for journalistic stickler, harsh taskmaster and the best teacher a young reporter could have had, Steven Brill.

Hostess Speaks: Why Its Executives Deserve Bonuses

After I published a story yesterday critical of Hostess Brands’ request that a bankruptcy judge grant approval for $1.8 million in executive bonuses to be paid by the insolvent company, Judge Robert Drain approved the plan and I heard from a Hostess spokesman, Lance Ignon of the public relations firm Sitrick And Company. Ignon, who has worked for Hostess for the last year and a half, explained why he thought I got it wrong when I said that the 19 executives don’t deserve extra pay to oversee a liquidation that is in part a result of their own mistakes.

Ignon’s argument: “The company’s prime goal now is to maximize the value of the company as it goes through liquidation.” He pointed out that the executives won’t simply receive the bonuses no matter how they perform. Rather, the extra pay is linked to the meeting of certain benchmarks for rapid disposal of the assets. Ultimately, that performance could be crucial for union workers who are losing their jobs. At this point, Hostess has $1 billion in unfunded pension liabilities. That money won’t even begin to be paid until Hostess pays at least $860 million owed to its secured creditors.

The Hostess story is complicated by the fact that after it came out of its previous bankruptcy, in 2009, the company was eventually propped up mainly by two hedge funds, Monarch and Silver Point. Those funds are the company’s primary debtors at this point. They provided much of the financing for the company to emerge from Chapter 11 and try to become solvent again. Ignon pointed out that the hedge funds will be largely responsible for funding the executive bonuses.

Ignon also reminded me of a fact that I left out of a previous story I wrote on why Hostess went under: About a month after the current CEO, Gregory Rayburn, got to the company in March 2012, he slashed executive compensation. Four of the top executives, including Executive Vice President John Stewart, had their salaries cut to just $1 a year. Stewart had been making $700,000 after the company’s compensation committee gave generous raises to ten senior executives, including then-CEO Brian Driscoll, in July 2011, before the company made its most recent Chapter 11 filing in January of this year. Though most of those executives have since left the company, one other remaining executive, Richard Seban, had his pay cut from $656,256 to $1.

As of mid-October, Stewart and Seban started earning their previous salaries, minus an 8%, reduction that applied to everyone who worked at Hostess, reports Ignon. Rayburn, who earns $125,000 a month, is not eligible for a bonus nor did he ask for one.

Though Ignon wasn’t specific about the benchmarks, he emphasized that the executives get nothing if they don’t meet a designated timetable for disposing of Hostess’ assets. Time is of the essence, he explained, because the more time elapses between production of the company’s familiar brands, including Twinkies, Ho Hos, Ding Dongs and Wonder Bread, the less value those brands have in the marketplace.

Ignon also clarified that the judge approved $4.36 million to be paid to non-executive employees at Hostess. Roughly 3,200 people are still working at Hostess.

Ignon says that 110 potential suitors are interested in buying parts of Hostess. At least six of those parties have hired large investment banks to help them put together deals. In a story late yesterday, The Wall Street Journalmentioned Thomasville, Ga.-based Flowers Foods, which makes Nature’s Own bread and Tastykake snacks, as a possible buyer.

Ignon kept emphasizing to me that the executive bonuses are contingent on maximizing the value of the company. “That ultimately is to the benefit of all the people and the organizations to whom Hostess owes money.” I still don’t like the idea of management, who is at least in part at fault for the failure of the company and the loss of more than 18,000 jobs, profiting from the company’s demise. But as a practical matter at this late stage, Ignon makes a compelling case for offering incentives to executives who are trying to sell off company assets as quickly and efficiently as possible.

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It doesn’t help a company for executives to offer to take a dollar per year then quit a few days, later to receive a huge pension. Executive pensions were one of the first things management increased. How about instead of bonuses they should have used penalties for executives who don’t perform. Anytime a company has to hire a PR firm to twist the truth, it is generally to cover a deception. You wouldn’t expect a defense lawyer to give you the truth in defending their client, neither should you trust a PR firm to tell the complete truth about a company. He essentially says that the Executives bonuses will be paid with money borrowed from hedge funds which will be paid back by proceeds of the sale instead of that money going toward employee pensions, is my understanding of his explanation. Hostess is based in Texas but hired the most expensive bankruptcy lawyer in the country, to file in New York were bankruptcy laws are more lenient. It is too bad Hostess executives weren’t as concerned about saving the company as they are about squeezing as much out of it as they can get.

Thank you for this thoughtful comment. I’m not sure whether PR firms always cover deceptions but they certainly advocate for their clients’ positions. I’m sure Hostess would argue with your characterization but I think you have it right about the bonuses being paid by the hedge funds before any money goes to employee pensions. The “secured” creditors, including the hedge funds, get paid before the unsecured creditors, which include the pension funds. Interesting about New York bankruptcy law. I didn’t know that detail. Thanks for bringing it up.

I think that Ignon was right in many areas and specifically that the current management team is focused and has incentives to maximize the sale of the Hostess Assets that will benefit everyone involved. What needs to be mentioned is that although this downfall is a combination of Management and Union self-serving posturing and stubbornness, there are many good employees- both management and union- that are stellar performers by their own abilities yet limited by the company politics that ultimately drove this company in the ground. Maybe this last job of selling off the assets to the highest buyer can let the performers truly shine now that all of the inside politics is put aside… Long live the Twinkie and SnoBall!

I appreciate your thoughts. I worked for Hostess and retired three years ago. While management and the unions should have worked together, even though I was not a union member, I blame most of the conflict on the company and it’s management, There were only two main unions that the company had to deal with, Teamsters, and BCTGM. They had 36 plants and different contracts with each local chapter, this was actually for their benefit as it wouldn’t make sense to pay a person in Boise ID. or St. Louis MO. the same as a person in Los Angeles or New York City. So not exactly the hundreds of contracts commonly reported. Union members had already taken some deep cuts 30 35 percent in the first bankruptcy, that included me though I wasn’t in the union. The cuts we were told would be temporary and would make the company financially sound and also that they would be returned once the company had recovered financially and doing well. When Executives turned around and gave themselves, raises, bonuses, million dollar pensions and other benefits, it was a slap in the face to the union members. I was able to retire but many of my coworkers were trapped there to finish the time required for them to receive a pension. Please keep in mind that these were not high paying jobs, an article in my local paper talked about a young father who was making $11.75 per hr. This was not like the overpaid auto workers. Also you should be aware that most of the reports of drivers not being able to load and unload products, double routes for bread and cake and delivery drivers not being able to unload their route trucks are false. The fact that the bankruptcy court noted that the company hadn’t even tried to negotiate with the union should be an obvious indication of what managements intentions truly were. The semi trucks were old, many with over 2 million miles, they broke down constantly and always needed repair. the trailers were old faded and rusty. Many of the drivers feared being pulled over by State Troopers or Highway patrols for fear that their trucks wouldn’t pass safety requirements. It became obvious that the company was not trying to recover. After all that union members had seen and already given, they voted by 92 percent not to accept anymore cuts. I wouldn’t have either after the cuts and having lost my pension because the company decided to quit paying on it.

I hope as well as the former employees that another company will purchase Hostesses assets and brands and reopen the plants soon. If they are hoping to use former employees though they will need to hurry. Hostess employees are generally known to be hard working dependable employees. They will be working somewhere else before long and not willing to return. You just can’t keep a good person down.

Tammy, I will admit you may be correct. I have very little understanding of bankruptcy. It is my understanding though, that they had not been out of the first chapter 11 bankruptcy long enough to qualify for a second chapter 11. If you will check though the bankruptcy filings and proceedings are in New York City.

I have been surprised by the many commentators, including you, who didn’t look at how Hostess execs were being treated previously and don’t seem to understand liquidation. You’ve simply been buying into the union press mostly. Try to remember that investors – the “hedge funds” – lost everything. That some previous regime execs made bad choices and were overpaid, but the unions have been far worse. Especially with work restrictions.

But worst is your fancy that somehow you can just liquidate a company. How, precisely? Put a “for sale” sign on it? It takes a LOT of inside knowledge, domain knowledge, contacts and skill. People with that knowledge and skill can command a high compensation rate for work that is less depressing. I have done similar (in a different field) at times, and it really does require high pay to get us to stay on to a death march. There’s no “happy side” to the job . And lots of vitriol from the web, such as from Sterling here… who happily casts aspersions and will never be called out for his lack of knowledge.

THAT is why the bonuses are required. It’s a hard job, requiring specialized knowledge, from a limited pool of people who have better options unless you compensate them well.

Mr. Ryder;As a twenty-five year union employee,would you kindly explain to me how the unions have been “far worse”. Far worse than or in what? And what work “restrictions” are you referring to? I have never met with any work restriction in any department any time during my employment with the current “Hostess Brands” or the previous “Interstate Brands” companies.

Robert, Please check my reply to David Ward for a substantiation of my knowledge of the events that led to the demise of Hostess. You may chose to believe what ever you want to believe, that doesn’t make it so. I just called it the way I watched it unfold. I try to keep an open mind and will admit when I am wrong, but I had an insider view of the company and didn’t like what I saw. Media has been very diligent about repeating Hostess’s Executives reasons for their inability to keep the company financially sound, but has done little to listen to or investigate the claims made by the vilified Union. My comments may seem spiteful towards Hostess, but it is very frustrating to read repeated comments about what unions required of the company, that aren’t true and were speculative to begin with. Your comment about the investors and their hedge fund are incorrect. Once all assets are liquidated the investors will be the first to be paid. The retirement fund for their employees which I understand is about 100 million, will most likely be one of the last. Meanwhile executive retirements are secured. I hope this helps you to understand my vitriol comments, and views.

As an ex-employee of Hostess Brands,considering the time of year,instead of rewarding overpaid boardmembers who have done nothing to better the company or it’s workers,should have paid employees their accrued vacation time for the year. There are only 5 weeks left in the year and it would have been a goodwill gesture instead of deepening the resentment that already exists. You or anyone commenting can spin,defend,or support boardmembers making six-figure incomes when we were told they were working for $1.00 for the rest of the year,but,as someone who has been in the trenches for 25 years if I were a baking company and any one of these people applying for a job that had “IBC”,or “Hostess Brands” on their resume,I would immediately have security escort them off the property. Call it sour grapes or what you will but I saw the demise of a once great company in eleven short years taking peoples’ lives along with it.

Mr Ryder, the Hedge funds have lost nothing at this point. Ripplewood Holdings the investment firm that put in $150 million lost all their money. They invested the money to be able to run the company and get a % of the future equity. Silverpoint and Monarch Capital bought the debt when the company came out of BK. Nobody knows what they really paid for that debt. They also got a couple years of interest payments and we all would like to know where the $140 million they didn’t pay into all the employee pension plans went because it sure wasn’t put back into the company, also if these top 19 execs, who ran the company into the ground with their leadership and decisions, what qualifies them to liquidate the company?

Ok so that is a great PR firm, what a twist on allowing the company to be pillaged on the way out…but as someone who is not in business, could someone explain why an individual who invests in a company, or perhaps starts their own company, and for whatever reason the company just doesn’t turn a profit, it goes under. Well, you lose your money. If the stock goes down you lose your money. Why are these ‘creditors’ these hedge funds who took a gamble and loaned Hostess money after the bankruptcy. Why are they guaranteed, at least whatever they can squeeze from liquidating assists? They invested, they lost. I understand they will probably take a hit, but why would they be entitled to anything? Thanks for any response.

A simplified answer: a company can try to acquire the cash they need (outside of operations) in two ways: debt financed or equity financed. Equity financed (investors) is through such things as stocks. Stock holders share in the profit of the company but have the risk of losing their money if the company goes down.

The other way is through debt financed (creditors), borrowing from banks or in this case hedge funds. Creditors do not share in the profit of the company (typically) but lend money to have interest and principal paid back to them. These creditors have secured their lending (and often have liens on the company’s assets, think of your home mortgage). Legally, once a creditor secures his lean, that creditor has a right to the proceeds from a bankruptcy liquidation over unsecured lenders (think of your Mom lending you $20). This is typically because the assets that are being liquidated were purchased or provided by the secured creditors (factory, equipment, etc). The more money that is generated through the liquidation process, the more money there is left over after the secured creditors have been paid to pay the unsecured creditors. Bankruptcy law details out the order in which all creditors are paid (this includes both secured and unsecured (which includes employment compensation)).

Tommy, Sorry I called you Tammy earlier, that was actually a mistake on my part and was unintentional. I hope you weren’t offended. I knew that the Investors are to receive there money from the liquidation first. I didn’t understand why though. Your explanation explained this to me. Thanks

i am also i former employee, and i have been behind the company. i have yet to receive my final reimbursment from the company, and when i email them asking aboout it, they say they dont know if they will be able to pay me back. i put up my own money to make sure their good were delivered every day they needed, and its a big slap in the face that these execs get 1.8 million, but im being told that they cant pay me back $600 because they are in liquidation. teamsters union isnt much help either stating the same thing, that ‘its going to be hard to get you paid back’. i didnt strike, i took the paycut, and i worked until the letter was posted on their site, i still havent received “a letter of termination” either. :(

I think it’s a bunch of BS,if they can pay the so called executives why couldn’t the company do right by the employee’s who make the product,without the know more company.I don’t think the executives deserves any special bonus.STRIKE STRIKE,union will always be around

my son worked for hostess for many years-they kept his last months salary,dumped his pension,dumped his medical and closed the doors 1 and one half weeks before christmas. giving exec bonuses is usual form our completely corrupt system of business-perhaps some of us lowly workers don’t understaND NOT TAXING THE RICH AND KILLING THE MIDDLE INCOME WORKER